MADISON, Wis. – Concerned that provisions in the Basel II (New Accord) capital standard regarding the treatment of loan loss may create a disadvantage for small financial institutions like credit unions, the World Council of Credit Unions submitted comments last month on the Basel Accord's most recent proposal. WOCCU's comments, said David Grace, senior manager of international trade association services, were submitted as part of WOCCU's continuing dialogue with the Basel Committee on Banking Supervision at the Bank for International Settlements. The goal of the Committee is to complete the New Accord by mid-year 2004, with implementation to take effect in member countries by year-end 2006. WOCCU is arguing that smaller financial institutions are more likely to use the simpler "standardized" approach to calculate capital ratios. Therefore, the proposed rating system for calculating capital "will comparatively penalize smaller financial institutions that inherently and statistically present much less systemic risk to financial systems. Such a penalty would have the opposite effect of what we believe the intention of the new Accord is: building safe and sound financial systems in the interest of the public at large," wrote WOCCU President/CEO Arthur Arnold in his Dec. 31st letter to Jaime Caruana, chairman, Basel Committee on Banking Supervision. The Basel Accord, which has been in effect since 1988, was originally intended for internationally active banks in the Group of 10 (`G10′) countries – Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Sweden, Switzerland, United Kingdom and the United States – so banks that operate internationally would have similar capital standards. Currently however, more than 100 countries claim to adhere to it and many apply the Accord to all banks. "If a financial institution can afford sophisticated capital models, then they can reduce their capital holding and that frees them up to do other activities," Grace explained. "The reality is that credit unions and most small financials cannot afford the more sophisticated capital models," he said, emphasizing that "at this point Basel isn't applicable to credit unions in the U.S." But should it be, asks Grace. "There should be some sort of capital standard that recognizes credit unions and puts them on an equal playing field with banks and changes the capital standard for credit unions." Even though Basel II doesn't apply directly to credit unions, Grace said "we have every reason to believe the new standard will apply to credit unions indirectly because of their competitive disadvantage." He further asked rhetorically: "If there is an international capital standard that 100 countries have adopted, then why are U.S. credit unions so unique that they don't have similar capital standards that are less restrictive and recognize secondary and risk-based capital?" -

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